Rate Decision Leaks From The Central Bank Of Turkey

I recently discussed tomorrow’s Central Bank of Turkey Monetary Policy Committee rate-setting meeting- try saying all this in one breath I was of course joking with regards to the leak. While Governor Basci gave strong indications on which rate(s) would be cut tomorrow, he is not committed in any way.

I watched him in Istanbul. I watched him in Ankara. I watched him in Denizli. I watched him in Izmir. And now I had a chance to watch him in Antalya last Tuesday.

Make no mistake. Neither is the object of my attention a rock star, but Central Bank of Turkey Governor Erdem Basçi, who was in the orange province to give a seminar titled “monetary policies”, organized jointly by the Antalya Chamber of Commerce and the Turkish daily Dunya. Since my beloved Besiktas had a cup game with Antalyaspor the next day, I had to have the four-hour trip from Marmaris.

Basci made quite a few important points in his Antalya speech. Since my friend Ozlem from Ata Invest already wrote those, I am referring you to her daily bulletin from last Wednesday, where she summarized those.

Growth worries are not behind tomorrow’s (probable) rate cut(s). This is contrary to what many analysts claim. But at least one economist agrees with me: Erste’s Nilufer Sezgin makes the same point in her pre-MPC note, which was published this morning. She also notes that even if the Bank worried about growth now, monetary policy affects the economy with a lag, and so cutting now would not make sense.

I completely agree. I also agree with her that the recent downward trend in inflation is not behind the cut(s), either. She believes that the cut is based on an expected resurgence of capital flows and the resulting real exchange rate appreciation- which is also the point I make in the column.

The one point I don’t agree with Nilufer is her classification of the policy rate cut as a return to orthodoxy. She is right that the Bank has not played with the policy rate for a while. But on the other hand, they are still making use of the corridor, it seems. So I would call it semi-orthodoxy or maybe preparation to return to orthodoxy. But that’s just semantics more than anything else…

Speaking of capital flows, while many believe that the Fed’s move will indeed mean more hot money to EMs, Bank of America Merrill Lynch argues that there may be some profit-taking in some EMs in the near-term, especially from some overbought countries like Turkey. That’s why I would have expected the Bank to exercise some caution.

If BoA ML is right, then we could see some year-end / early-2013 lira depreciation. Note that speaking at the beginning of the year (Jan. 16 to be exact), Governor Basci had said the following: “Jot this down! The lira will beat the dollar this year!” Since I did not have any paper, I had to write it on my hand.

in Turkish, of course. Which makes me wonder if Basci would try to keep his promise if there is depreciation pressure on lira in the next few weeks. I am joking, of course. As you can see in the chart below, the lira had depreciated quite a bit at the end of December- early January, which had led Basci to make those remarks to “verbally intervene” in the first place. So he’ll probably win his bet. But all I am saying is that the Bank could have been a bit more prudent at this stage.

After all, have a look at the graph above to see what happened when the Bank cut the policy rate in August of last year, right in the middle of the eurozone crisis.